We Think Fraser & Neave Holdings Bhd (KLSE:F&N) Can Manage Its Debt With Ease

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Fraser & Neave Holdings Bhd (KLSE:F&N) makes use of debt. But the more important question is: how much risk is that debt creating?

We check all companies for important risks. See what we found for Fraser & Neave Holdings Bhd in our free report.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Fraser & Neave Holdings Bhd's Debt?

As you can see below, Fraser & Neave Holdings Bhd had RM705.0m of debt, at December 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have RM1.22b in cash offsetting this, leading to net cash of RM511.6m.

How Strong Is Fraser & Neave Holdings Bhd's Balance Sheet?

The latest balance sheet data shows that Fraser & Neave Holdings Bhd had liabilities of RM1.48b due within a year, and liabilities of RM530.5m falling due after that. Offsetting this, it had RM1.22b in cash and RM1.03b in receivables that were due within 12 months. So it actually has RM236.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Fraser & Neave Holdings Bhd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Fraser & Neave Holdings Bhd has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for Fraser & Neave Holdings Bhd

In addition to that, we're happy to report that Fraser & Neave Holdings Bhd has boosted its EBIT by 38%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Fraser & Neave Holdings Bhd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Fraser & Neave Holdings Bhd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Fraser & Neave Holdings Bhd recorded free cash flow worth 76% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Fraser & Neave Holdings Bhd has net cash of RM511.6m, as well as more liquid assets than liabilities. And we liked the look of last year's 38% year-on-year EBIT growth. So we don't think Fraser & Neave Holdings Bhd's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Fraser & Neave Holdings Bhd, you may well want to click here to check an interactive graph of its earnings per share history.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.